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In may 2009 two other modifications were made to the

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In May 2009, two other modifications were made to the conservatorship agreements: The $850 billion asset limit was raised for each GSE to $900 billion, and the debt limit was raised to 120% of the asset limit. It was clarified that the 10% annual reductions in the asset portfolio had to be calculated based on the asset limit and not the actual asset position. For example, the December 31, 2010, limit on the portfolio of each GSE is $810 billion. In a January 2010 report, the Congressional Budget Office estimates that the GSEs’ bailout realistically added $291 billion to the federal deficit in 2009 and that it will add another $99 billion in 2010-2019. The total bailout cost will very likely exceed the initial $200 billion commitment. 5.2.4 Additional Programs Several additional programs were introduced as part of the GSE bailout. First, the Treasury can directly purchase Freddie and Fannie MBS. As of December 2009, it had purchased $221 billion worth (having made no purchases since). Second, the Federal Reserve embarked on a massive GSE MBS purchase program in January of 2009. It made its last purchase on March 31, 2010, having fully exhausted its $1,250 billion target capacity. Third, the Federal Reserve purchased $172 billion in Agency debt, the debt issued by Freddie and Fannie, between December 2008 and March 2010. It has nearly exhausted its target capacity of $175 billion. The latter two programs are responsible for a doubling of the Federal Reserve’s balance sheet. The next chapter provides more detail. With the conservatorship comes an important question: Should the debt of the GSEs be consolidated with the federal debt? Because the U.S. government has only a 79.9% and not an 80% stake in the GSEs, it does not technically have to consolidate the GSEs’ accounts into the federal budget. (It also does not have to assume the pension liabilities of the GSEs.) We believe that it should do so, because the GSEs are de facto backed by the full faith and credit of the U.S. government debt. However, that implies that the national debt as of July 2010 is not $8.7
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70 trillion, but $10.3 trillion. In fact, the tax payer is ultimately liable for the default risk on all $8.1 trillion of GSE debt and GSE-backed securities. (But, of course, the consolidation would also move the GSEs’ assets into the federal government’s accounts.) 5.3 Anemic Recovery While the recession in the U.S. likely ended in the summer of 2009, the country’s macroeconomic problems are far from over. The current recovery has seen anemic employment growth. The housing market has barely perked up. New residential construction and applications to build new homes hit rock bottom in July 2010. New home sales declined to the lowest level ever recorded in May 2010, since records began in 1963! House prices have recovered modestly from a low point of 152 to 160 in May 2010, according to the Case-Shiller 10-city index, but are facing continued headwinds from mounting foreclosures. The 930,000 foreclosure filings in the first quarter of 2010 were up 16% from a year earlier. An additional 895,500 notices were filed in the second quarter of 2010, up 1% from a year earlier. It seems
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